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So far assumed that L(S) and L(D) curves cross at a wage at which the L(S) curve slopes upward. At high wages, income effect may dominate, L(S) curve may bend backward. What if L(S) curve bends backward when it crosses the L(D) curve? Backward Bending Labor Supply Wage Wage L(S) L(D) L

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Backward Bending Labor Supply

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Backward bending labor supply l.jpg

So far assumed that L(S) and L(D) curves cross at a wage at which the L(S) curve slopes upward.

At high wages, income effect may dominate, L(S) curve may bend backward.

What if L(S) curve bends backward when it crosses the L(D) curve?

Backward Bending Labor Supply

Wage

Wage

L(S)

L(D)

L


Backward bending labor supply2 l.jpg

If L(S)* is more steeply sloped than L(D)*:

Equilibrium wage W* still wage at which L(S) curve & L(D) curve cross

Equilibrium qty. of labor transacted L* still L(S) and L(D) at which curves cross.

Employer and employee surplus equal areas shown: employee surplus flawed.

Backward Bending Labor Supply

Wage

Wage

L(S)

W*

L(D)

L*

L

Employee surplus

Employer surplus


Backward bending labor supply3 l.jpg

If L(S)* is more steeply sloped than L(D)*:

If wage is greater than equilibrium wage, L(S) greater than L(D)

More workers seeking jobs than job vacancies firms seek to fill

Wage bid down to equilibrium wage

Backward Bending Labor Supply

Wage

Wage

L(S)

W(hi)

W*

L(D)

L(D)

L(S)

L


Backward bending labor supply4 l.jpg

If L(S)* is more steeply sloped than L(D)*:

If wage is lower than equilibrium wage, L(D) greater than L(S)

More job vacancies firms seek to fill than workers seeking jobs

Wage bid up to eq. wage

Stable equilibrium: when wage  eq. wage, wage is bid back to eq. wage

Backward Bending Labor Supply

Wage

Wage

L(S)

W*

W(lo)

L(D)

L(S)

L(D)

L


Backward bending labor supply5 l.jpg

If L(D)* is more steeply sloped than L(S)*:

Equilibrium wage W* still wage at which L(S) curve & L(D) curve cross

Equilibrium qty. of labor transacted L* still L(S) and L(D) at which curves cross.

Considered an “unstable equilibrium,” unrealistic depiction of labor market.

Backward Bending Labor Supply

Wage

Wage

L(D)

L(S)

W*

L*


Backward bending labor supply6 l.jpg

If L(D)* is more steeply sloped than L(S)*:

If wage is greater than equilibrium wage, L(D) is greater than L(S)

More job vacancies firms seek to fill than workers seeking jobs

Wage bid upward, away from W*

Backward Bending Labor Supply

Wage

Wage

L(D)

L(S)

W(hi)

W*

L(S)

L(D)


Backward bending labor supply7 l.jpg

If L(D)* is more steeply sloped than L(S)*:

If wage is less than W*, L(S) is greater than L(D)

More workers seeking jobs than job vacancies firms seek to fill

Wage bid downward, away from W*

Unstable equilibrium; when wage  eq. wage, wage is bid away from eq. wage.

Backward Bending Labor Supply

Wage

Wage

L(D)

L(S)

W*

W(lo)

L(D)

L(S)


Shifts in labor supply l.jpg

Suppose something happened to increase the quantity of labor supplied, other than a change in the employee wage:

Increase in preference for consumption over leisure

Decrease in employee wage of other kinds of work

Decrease in non-labor income of workers

Shifts in Labor Supply

L(S)

Wage

W*

L(D)

L*


Shifts in labor supply9 l.jpg

“Increase in labor supply”

Expressed with outward shift of labor supply curve

Quantity of labor supplied increases independently of price.

Lower equilibrium wage

Higher equilibrium quantity of labor transacted

Shifts in Labor Supply

L(S)

L(S)

Wage

W*

W*

L(D)

L*

L*


Shifts in labor supply10 l.jpg

Interpretation:

At equilibrium, the quantity of labor supplied [L(S)] equals the quantity of labor demanded [L(D)].

In other words, all workers seeking jobs have jobs, and all firms have all job vacancies filled.

Shifts in Labor Supply

L(S)

Wage

W*

L(D)

L(D) =

L(S)


Shifts in labor supply11 l.jpg

Interpretation:

Now, there is an “increase in labor supply”

This causes the quantity of labor supplied to increase and become greater than the quantity of labor demanded.

In other words, the number of workers who want jobs is greater than the number of job vacancies firms seek to fill.

Shifts in Labor Supply

L(S)

Wage

W*

L(D)

L(D)

L(S)


Shifts in labor supply12 l.jpg

Interpretation:

As too many workers chase too few jobs, the wage is bid downward.

As the wage declines, the number of people who want jobs decreases…

…and the number of job vacancies firms open up and fill increases…

Shifts in Labor Supply

L(S)

Wage

W*

L(D)

L(D)

L(S)


Shifts in labor supply13 l.jpg

Interpretation:

…until a new equilibrium wage at which the quantities of labor supplied and demanded are equal.

Since the wage decrease caused firms to open more job vacancies, the new equilibrium quantity of labor transacted is higher than the old one.

Shifts in Labor Supply

L(S)

Wage

W*

L(D)

L(S) =

L(D)


Shifts in labor supply14 l.jpg

Shifts in Labor Supply

L(S)

L(S)

L(S)

L(S)

Wage

Wage

W*

W*

W*

W*

Elastic

L(D)

Inelastic

L(D)

L*

L*

L*

L*

The greater the elasticity of labor demand, the smaller the wage decrease, the greater the employment increase from an increase in labor supply.


Shifts in labor supply15 l.jpg

A decrease in labor supply has the opposite effect:

May be caused by increase in non-labor income, in preference for leisure over consumption

Increases equilibrium wage

Decreases equilibrium quantity of labor transacted

Shifts in Labor Supply

L(S)

L(S)

Wage

W*

W*

L(D)

L*

L*


Shifts in labor demand l.jpg

Suppose something increased the quantity of labor demanded, other than a change in the employer wage:

Increase in product demand

Increase in wage* of substitute kind of labor (sub. effect dominates)

Decrease in wage* of complement kind of labor

Shifts in Labor Demand

L(S)

Wage

W*

L(D)

L*


Shifts in labor demand17 l.jpg

Increase in labor demand

Expressed with outward labor demand curve shift

Quantity of labor demanded increases independently of price

Higher equilibrium wage

Higher quantity of labor transacted if L(S) curve is upward sloping

Shifts in Labor Demand

L(S)

Wage

W*

W*

L(D)

L(D)

L*

L*


Shifts in labor demand18 l.jpg

Interpretation:

At equilibrium, the quantity of labor supplied [L(S)]* equals the quantity of labor demanded [L(D)]*.

In other words, all workers seeking jobs have jobs, and all firms have all job vacancies filled.

Shifts in Labor Demand

L(S)

Wage

W*

L(D)

L(S) =

L(D)


Shifts in labor demand19 l.jpg

Interpretation:

When there is an “increase in labor demand,” the quantity of labor demanded increases and becomes greater than the quantity of labor supplied.

This means that the number of vacancies firms wish to fill is greater than the number of workers who want jobs.

Shifts in Labor Demand

L(S)

Wage

W*

L(D)

L(S)

L(D)


Shifts in labor demand20 l.jpg

Interpretation:

With too many firms chasing too few workers, the wage is bid upward…

…causing firms to want to hire fewer workers, decreasing the quantity of labor demanded…

…and causing more people to want to work, increasing the quantity of labor supplied.

Shifts in Labor Demand

L(S)

Wage

W*

L(D)

L(S)

L(D)


Shifts in labor demand21 l.jpg

Interpretation:

…until a new, higher equilibrium wage at which the quantities of labor supplied and demanded are equal is reached.

Since the wage increase has drawn more workers into the market, the new equilibrium quantity of labor transacted is higher than the old one.

Shifts in Labor Demand

L(S)

Wage

W*

L(D)

L(S) =

L(D)


Shifts in labor demand22 l.jpg

Shifts in Labor Demand

L(S)

L(S)

Wage

Wage

L(D)

L(D)

W*

L(D)

L(D)

W*

W*

W*

L*

L*

L*

L*

The greater the elasticity of labor supply, the smaller the wage increase, the greater the employment increase from an increase in labor demand.


Shifts in labor demand23 l.jpg

Decrease in labor demand has opposite effect:

May be caused by decrease in product demand, or decrease in wage* of substitute kind of labor (sub. effect dominates), etc.

Decrease equilibrium wage

Decreases equilibrium quantity of labor transacted

Shifts in Labor Demand

L(S)

Wage

W*

W*

L(D)

L(D)

L*

L*


Shifts in labor demand24 l.jpg

Effect of labor demand increase is different if labor supply curve bends backward at equilibrium wage

Equilibrium wage increases--by a lot

Equilibrium quantity of labor transacted decreases

Shifts in Labor Demand

Wage

L(S)

W*

W*

L(D)

L(D)

L*

L*


Shifts in labor demand25 l.jpg

Interpretation:

At equilibrium, the quantity of labor supplied equals the quantity of labor demanded.

All workers who want jobs have jobs, and all vacancies that firms wish to fill are filled.

Shifts in Labor Demand

Wage

L(S)

W*

L(D)

L(S) =

L(D)


Shifts in labor demand26 l.jpg

Interpretation:

When labor demand increases, the quantity of labor demanded increases and becomes greater than the quantity of labor supplied.

In other words, the number of vacancies firms wish to fill is greater than the number of workers who want jobs.

Shifts in Labor Demand

Wage

L(S)

W*

L(D)

L(S)

L(D)


Shifts in labor demand27 l.jpg

Interpretation:

The wage is bid upward…

…but the income effect is dominant, so the wage hike causes fewer people to want work and a decrease in the quantity of labor supplied!

However, the increase in the wage also causes firms to close vacancies, also reducing the quantity of labor demanded.

Shifts in Labor Demand

Wage

L(S)

W*

L(D)

L(S)

L(D)


Shifts in labor demand28 l.jpg

Interpretation:

Although both L(S) and L(D) are dropping, L(D) drops faster, eventually falling enough to be equal to L(S) at a new, much higher equilibrium wage.

Since the wage increase has caused fewer workers to want to work, the new equilibrium quantity of labor transacted is lower.

Shifts in Labor Demand

Wage

L(S)

W*

L(D)

L(S) =

L(D)


Shifts in labor demand29 l.jpg

Decrease in labor demand has opposite effect:

May be caused by decrease in product demand, or decrease in wage* of substitute kind of labor (sub. effect dominates), etc.

Decreases equilibrium wage

Increases equilibrium quantity of labor transacted

Shifts in Labor Demand

Wage

L(S)

W*

W*

L(D)

L(D)

L*

L*


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